I’m sure you will agree that deciding whether equity release is the best way to pay for your care can be tricky.
However, it is an option that many people are now taking,as they find that their wealth is tied up in their homes. Whilst there are some great equity release schemes out there, there are some that are very expensive. Therefore, it is important that you understand everything. We will help ensure that you do not wasted thousands of pounds on the wrong deal.
In this guide we will help you by explaining:
There are three primary options available if you want to use your property to pay for your care costs. We’ve compiled helpful information pages, in our paying for care section, to explain them in detail – simply click on each to continue reading. In this section we focus on equity release.
You can also read more in our how does equity release work, if you need more detail.
This section is all about releasing equity. Our comprehensive guide offers easy to digest details about releasing equity to help you to determine whether it is a viable option for you. But releasing equity from your home in order to pay for care may not be the best option for you – which is why it’s important to be fully informed and to understand all options available.
Before considering releasing equity from your home you should know the process inside out – and in this informative guide we explain how releasing equity works, what options are available and who this type of care funding is most appropriate for to help you to decide.
Equity release is a mechanism that allows you to release some money from your house and generate an income based on the value of your home.
Directly translated, releasing equity from your home simply means generating the funds effectively tied up in your property to use now rather than upon the sale of your home.
Only certain people are eligible to release equity in a house. Generally the criteria includes homeowners aged 55 and over who own their house outright, in possession of properties of £70,000 or more. There are also minimum loan amounts – usually starting at around £10,000.
Here is a short video from Which explaining equity release.
Understanding how releasing equity works is really important, as for many people, the largest asset that they own is their home.
In addition, actually understanding what you need to do to release equity from property is one of the first things you should take care of.
Whilst equity release schemes are not exclusively used to pay for long-term care, they are increasingly becoming popular ways to help people to potentially fund a better care home or higher standard of home care provision.
In addition it is being used by people who want to receive care in their own home and therefore can to use the money to make modifications and changes to their home as required.
The amount that you release may depend on a number of factors, but one will certainly be how much you need to fund your care costs.
We have an equity release care calculator that you can use to estimate how much cash you can take out of your home.
When you release equity from your home you are receiving money in return for a share of your property.
So in effect, you are either re-mortgaging or selling off part of your home. Common reasons people choose to release equity from their homes include:
As above, equity release isn’t exclusively reserved for those needing to pay for care.
For this reason it’s important that you determine whether this option is right for you. The scheme and provider you include should also be appropriate and suit your requirements.
When you speak to an equity release schemes provider you’ll need to ask them what releasing equity from your home involves.
They will explain that you will receive a cash sum from them based on the value of your home, which they will then charge interest on. To access it, you need to be at least 55 years of age.
Importantly, where you use equity release schemes, you can continue to live in your own home, as typically it will remain as your property.
Any sum that is released to you will have to be repaid (plus interest) when the house is sold and if the home is owned by a couple, then the money is usually repayable on the death of the second person.
There is a wide range of different equity release schemes available, which is why we would always strongly recommend that you take advice before you choose between equity release schemes.
When speaking to a specialist advisor it is important you ask them to clearly explain what will happen when you release equity from property and how it will affect you both now and in the future.
There are two main types of equity release schemes; a lifetime mortgage and a home reversion plan and a drawdown lifetime mortgage. In this section we will focus on lifetime mortgages and home reversion plans.
A lifetime mortgage is one of the most popular ways to release equity from property. Here are the key pieces of information
– It involves taking out a long-term loan secured against your property – so when you opt for a lifetime mortgage you will be loaned money against the value of your house.
– You’ll need to pay interest on the loan – either in the form of regular payments or when the policy ends.
– Generally, the older you are the more you can borrow against the value of your property. This is because you represent a lower ‘risk’ to the equity release scheme provider. For example, a 65 year old couple may be able to borrow 30% of the value of their property when taking out a lifetime mortgage, whilst an 80 year old couple might be able to borrow up to 40%. The value of any mortgage or loan will be repayable when the house is sold.
– A lifetime mortgage is most appropriate for anyone who wishes to retain full ownership of their home. If you’re not sure about whether a lifetime mortgage is for you there is another option – a home reversion plan. You can find details of this below.
A home reversion plan involves selling part or all of your home, receiving a tax-free lump sum (or a regular income) in return. Here are some key pieces of information.
– When you opt for a home reversion plan, all or part of your house will be sold to a home reversion company – but you will still be able to live in the property as a tenant. You won’t need to pay rent – but you’ll be responsible for ground rent and council tax.
– A home reversion plan is so-called because ownership reverts back to the company when you or your partner dies or moves into care.
– Using this approach you sell a portion of your property to a home reversion company who in turn give you a tax-free lump sum. You can either sell a larger portion at the start, or sell smaller percentages over time depending on when you need the money. The amount owed is then not repayable until the house is sold, which is usually when the homeowner dies.
– You can expect to receive around 20-60% of the market value of your home.
– Before settling on a home reversion plan you should weigh up both options and obtain professional advice if possible. This is a higher risk option compared with a life mortgage, and it can carry additional implications for your tax, benefits and inheritance.
It is essential that you use a specialist to secure an equity release scheme. They will ensure that your interests are always protected and also ensure that you dont waste thousands of pounds on a bad deal.
There are two options for you to consider.
We have created a directory of advisors that specialise in helping people find the right equity release provider. The directory has advisors listed from all over the country. You can access the equity release advisor directory here.
If you do not feel confident in choosing an advisor, you can leave your details below, and we will find an advisor for you. We do not charge for this service and it is absolutely free.
Here is a video from Martin Lewis on ‘This Morning’ explaining why you should speak to a specialist before taking on an equity release plan.
We advise that you ask a specialist how equity release works so that they can help you understand the pros and cons. The consequence of not doing so may mean that you end up overpaying or losing out, both now and in the future. A specialist advisor will be able to:
– Advise you on whether equity release schemes are the best option for you to obtain additional money
– Help review equity release schemes and find the deal that is right for you. Many equity release schemes charge sizeable set up fees (sometimes costing thousands of pounds), so an advisor can help find you the best deal
– Review the terms of the deal, including the level of interest being charged, and explain independently to you and your friends or family the risks that you are taking on and what the implications will be in the future, particularly if you are thinking about estate planning and in particular ways to avoid having your family pay inheritance tax.
– Help estimate how much the equity release schemes are going to cost you
You should also shop around when choosing which equity release provider is best for you. Not all companies are equal – and they will all offer varying rates and terms. This is also something an advisor can assist with.
The obvious benefit of an equity release scheme is that it allows you to access money quickly without you having to move out of your home. This makes it a viable option both for those entering residential care or sheltered accommodation, and for anyone who wishes to access care at home.
From a financial perspective equity release also enables you to reduce the amount of Inheritance Tax your relatives will be liable to pay by default, as it reduces the value of your estate.
The advantages you can expect (and the positive impact they’ll have on your life) will depend on your financial situation.
Despite individual benefits there are a number of risks associated with equity release schemes, so it is important that you take specialist advice to ensure you are not overpaying and are receiving the best possible value for money. You may also decide that the risks involved are too great – this is another reason why information is key when considering equity release.
Firstly it’s important to note that equity release is not right for everyone. Whilst this market is growing and a number of new equity release providers are entering the industry, you may still find the terms on which they will lend you the money can be both inflexible and expensive.
When you are using a home reversion plan, the big risk is that you will lose sole ownership of your home.
For example, the home reversion company may own 25% and you own 75%. Therefore, on the sale of the property, only 75% will be repayable. You’ll be able to sell your property – but you won’t be eligible for the full amount.
Another factor to consider is the cost. Typically the interest on the lifetime mortgage is much higher than standard mortgage rates. With a lifetime mortgage, most providers do not allow you to pay off the interest as you go along.
It will all be added to the lump sum that is paid at the end. Therefore, it is not unfeasible that after 10-15 years you have to repay twice the amount that you borrowed. Interest can mount up considerably over time.
Other drawbacks include a reduced inheritance (which may not include your home) to leave for relatives, buildings insurance and maintenance liability, which can be costly.
When you release equity in a house it does have implications for the future financially – as discussed above. But you should also think about the future of your care in relation to your funding methods.
Whether you release equity in a house or choose to rent or sell your home you may find that there are financial implications which could affect the type of care you can afford.
As your main goal in releasing equity is to fund care, think about whether the equity release will be able to fully cover the cost of your care, or whether it will only partially meet your needs.
If an equity release will only partially fund your care for a limited period of time you’ll need to consider how you’ll meet the additional costs.
When you release equity in a house it can also affect the benefits you receive. Any means-tested benefits may be reduced or taken away once you receive the lump sum provided by equity release. Non-means tested benefits and income such as pensions will not be affected.
It’s also key to remember that when you release equity in a house you unexpectedly may not fully cover the costs of your care. This often occurs when a person’s condition worsens prematurely without warning.
Before searching for care and making a decision regarding funding you should estimate the full cost of your care, remembering to factor in the possibility of a more intensive care requirement in years to come (you can use our handy Care Cost Calculator to generate an accurate idea of the prospective future cost of care).
As well as the video above where Martin Lewis talks about why you should speak to an advisor before taking out an equity release scheme, we recommend you watch this really useful video from the government’s Money Advice Service where individual’s talk about the benefits of taking independent financial advice.
You can access our directory of professional financial advisors who can help you consider whether equity release is right for you. We also provide information on other funding options you should consider.